Samsung Electronics (005930) and SK Hynix (000660) single-stock leveraged exchange-traded funds (ETFs) are being identified as a key factor amplifying market volatility. This year, daily forced liquidation amounts have exceeded 100 billion won (approximately $66.7 million) on six occasions, with five of those occurring after the two single-stock leveraged ETFs were listed on May 27. As retail investors’ short-term trading funds concentrate in leveraged ETFs, the damage from “debt-fueled investing” is snowballing.
According to the Korea Financial Investment Association on the 12th, actual forced liquidation amounts reached 142.197 billion won (approximately $94.9 million) on the 9th, marking the fourth-largest single-day total on record. This came just 11 trading days after the previous breach of the 100 billion won threshold on June 24, when forced liquidations hit 110.793 billion won (approximately $73.9 million). Cumulative forced liquidations from the 1st to the 9th of this month totaled 344.2 billion won (approximately $229.7 million). Notably, the forced liquidation amount on the 9th alone was equivalent to roughly 70% of the total forced liquidations recorded from the 1st through the 8th of this month (202 billion won).
Forced liquidation is a process where a brokerage forcibly sells a client’s holdings when the investor fails to repay borrowed funds on time or when the collateral maintenance ratio falls below a certain threshold. This year, there have been six instances where daily forced liquidations exceeded 100 billion won. The largest on record, based on actual settlement figures compiled by the Korea Financial Investment Association, was 169.796 billion won (approximately $113.3 million) on June 9. That was followed by 166.192 billion won (approximately $110.9 million) on June 5 and 145.842 billion won (approximately $97.3 million) on May 20. With the exception of May 20, all five other instances occurred after the single-stock leveraged ETFs were listed.
The recent surge in forced liquidations is attributed to both semiconductor stock volatility and the expansion of leveraged investing. South Korea’s benchmark KOSPI index has been on an extreme roller-coaster ride, breaking above the 9,000 level for the first time on the 18th of last month before plunging to 7,291.91 on the 9th. The Samsung Electronics and SK Hynix single-stock leveraged ETFs, listed on May 27, saw a massive influx of retail investor funds and a surge in trading volume early on, but ETF prices subsequently fell more than 20% amid earnings releases and a global stock market correction.
According to the Korea Exchange, half of the top 10 ETFs by trading volume from June 1 to the 10th of this month were single-stock leveraged products. Specifically, these included ‘SOL SK Hynix Futures Single-Stock Leveraged’ (3rd), ‘KODEX SK Hynix Single-Stock Leveraged’ (4th), ‘TIGER SK Hynix Single-Stock Leveraged’ (6th), ‘KODEX Samsung Electronics Single-Stock Leveraged’ (7th), and ‘TIGER Samsung Electronics Single-Stock Leveraged’ (10th). The top-traded ETF was ‘KODEX 200 Futures Inverse 2X,’ with 314.6 billion shares traded.
The structural characteristics of leveraged ETFs are also analyzed as a factor amplifying volatility. Kim Jun-young, a researcher at iM Securities, noted, “The current domestic stock market has a structure where high volatility and large-scale leveraged products are layered on top of thinning liquidity.” He diagnosed that “when volatility increases, the rebalancing volumes of leveraged ETFs and margin-call forced liquidations overlap in the same direction, and with a lack of marginal buyers to absorb them, volatility can expand further.” Leveraged ETFs adjust their positions near the market close each trading day to meet target returns, buying more when prices rise and selling when they fall, meaning that as volatility increases, so does the scale of their trading.
Researcher Kim pointed out, “The scale of SK Hynix single-stock leveraged ETFs exceeds four times the average daily trading value of the underlying asset, and for Samsung Electronics, it is about 2.8 times,” adding that it is “a structure where the scale of derivatives overwhelms the liquidity of the underlying asset compared to major U.S. semiconductor companies.”
Retail investors continued their buying spree even during this month’s downturn, absorbing shares offloaded by foreign and institutional investors. From the 1st to the 10th, retail investors net purchased 1.6624 trillion won (approximately $1.1 billion) across seven SK Hynix single-stock leveraged ETFs, while institutions and foreign investors were net sellers of 1.5724 trillion won (approximately $1.0 billion) and 136.1 billion won (approximately $90.8 million), respectively. For seven Samsung Electronics single-stock leveraged ETFs, retail investors net purchased 599.1 billion won (approximately $399.7 million), while institutions net sold 516.6 billion won (approximately $344.7 million). Yu Myung-gan, a researcher at Mirae Asset Securities, analyzed that “the recent expansion in volatility stems from the short gamma structure of single-stock leveraged products rather than fundamentals,” adding that “while additional buying and selling amounts have decreased due to price changes in SK Hynix and Samsung Electronics, the absolute amounts remain high.”
Meanwhile, margin trading in the KOSDAQ market is contracting rapidly. According to the Korea Financial Investment Association, KOSDAQ margin loan balances stood at 9.8563 trillion won (approximately $6.6 billion) on May 27, when the single-stock leveraged ETFs were listed, but fell to 7.7962 trillion won (approximately $5.2 billion) by the 9th — a decline of approximately 2.06 trillion won (approximately $1.4 billion), or 20.9%, in just a month and a half. Over the same period, margin balances on the main KOSPI market increased by 1.0296 trillion won (approximately $687.0 million), from 27.8078 trillion won (approximately $18.6 billion) to 28.8374 trillion won (approximately $19.2 billion). Market analysts suggest that retail funds exiting small- and mid-cap stocks moved into leveraged ETFs in pursuit of short-term gains, only to see losses mount amid the recent sharp decline.
Despite the significant increase in forced liquidations, the scale of margin trading remaining in the market is still substantial. As of the 9th, total margin loan balances stood at 36.6336 trillion won (approximately $24.4 billion), with 28.8374 trillion won on the KOSPI market and 7.7962 trillion won on the KOSDAQ market. Although showing a recent downward trend, the level remains elevated, making it difficult to rule out the possibility of another surge in forced liquidations if additional volatility arises. Kang Jin-hyuk, a senior researcher at Shinhan Investment Corp., said, “The recent market is seeing expanded volatility as supply-demand factors such as leveraged ETFs and forced liquidations intertwine,” adding that “with investment sentiment worsening due to the breach of technical support levels, one needs to keep in mind the possibility that high volatility will persist in the short term.”
Following Samsung Electronics’ earnings release, the underlying asset underwent a correction, further widening the decline in leveraged ETFs. Over the three trading days from the 7th to the 9th, after Samsung Electronics announced its preliminary second-quarter results on the 7th, Samsung Electronics single-stock leveraged ETFs accounted for seven of the top 10 ETFs by decline rate. As of the 9th, outstanding margin receivables also stood at 1.4322 trillion won (approximately $955.6 million), indicating that ultra-short-term debt-fueled investing also remains at elevated levels.
A securities industry official advised, “The stock market these days is showing unpredictable, volatile trading that swings wildly on even small variables. Since the share prices of blue-chip stocks like Samsung Electronics and SK Hynix are also fluctuating sharply, excessive debt-fueled investing is not advisable.”